I really enjoyed reading Banerjee and Duflo's article, as I thought they did a good job of getting behind the psyche of the severely impoverished. I particularly enjoyed the final section where they analyzed the poor's decisions; "Understanding the Economic Lives of the Poor" answered many of the questions I had when reading earlier sections of the paper. In that section, the discussion on why poor people don't specialize in their jobs particularly struck me. The popular criticism that the poor are lazy or lack a strong work ethic does not stand up to Banerjee and Duflo's findings. Whether or not holding multiple jobs is the best method for long term economic success may be questionable, but the workers determination to find secondary employment rather than sit idly is admirable. I was also particularly interested in the authors' discussion of the role a lack of secure banks plays in development prospects. Until Prof Casey mentioned this in class on Tues, I had not thought about how not having a secure place to put savings can damper the incentive to save. I had heard about how the poor have difficulty getting loans because of bad credit and high interest rates, but hadn't considered that there might not even be an available bank. I hope to learn more about the role financial institutions can play in development prospects during the semester.
Benerjee and Duflo, throughout their entire paper, outline reasons as to why increasing the availability of credit to poor households would help them deal with many of the problems they face and presumably increase their standard of living. The paper mentions the entrepreneurial spirit of many of the poor and includes information on a survey done in West Bengal that found that the median household has three working members with a combined seven occupations. The paper discusses the high cost of credit and the lack of reliable ways to save money and accumulate capital. Also discussed is the idea that the majority of businesses owned by the poor are too small to operate efficiently. After reading about the situation of the poor, it seems obvious that microfinance and a more effective system of making credit available to poor households would solve a lot of problems and increase the economic productivity of the poor. However, Benerjee and Duflo state at the end of the paper that “making money is not a huge priority” for the poor and that they sense “a reluctance of poor people to commit themselves psychologically to a project of making more money” (Benerjee and Duflo 23-24). Up to this point, as an investor I would be willing to explore the option of lending money to the poor, however, my goal would be to see a return on my investment, yet if my debtor lacks the motivation to make more money, why would I make the investment? After hearing the anecdotal stories about the success of many women in operating and expanding their businesses I wonder whether Benerjee and Duflo ignore gender when they make their statements that the poor are reluctant to make the effort to make more money. The two examples they give supporting the idea that the poor do not try and make more money are the reluctance of the poor to migrate for longer periods of time to higher wages and the reluctance of farmers to purchase fertilizers. In both of these cases, men are the ones lacking the effort to earn more income as the men are the ones who would migrate and the men are the ones who would purchase the fertilizer. Therefore I wonder if a study done where women are given the opportunity to earn more income would refute the idea that the poor in general are reluctant to try and increase their income.
Two things really stood out in the article that seemed astounding to me. The first was that 'micro-loans' appeared to have residual effects beyond pro sucessfull viding capital to individuals living in these standards of poverty. Of course, the main purpose of these loans would be to issue capital to families so that they could pursue their entrepreneurial interest and make their operations more efficient thereby creating a steady future stream of cash flows that could allow the family to support itself. But at the same time, the article mentions the fact that these micro-loans appeared to have effects on personal savings of families in poverty. Throughout this report, numerous times the author highlights the fact that individuals and families intend to save for medical emergencies and time of famine, but end up spending their excess savings due to multiple social failures such as a lack of savings institutions. To counter this problem, the author points out on page page 15 of the article that micro-credit entices individuals to save rather than spending all of the money that they have at that moment in time. By making these micro-loans, it essentially required the credit receivers to make wiser and more rational decisions when thinking about their income, and luxury spending.
The other interest point that came to my attention was the fact that a large percentage of these poverty stricken populations and communities spent money to buy luxury goods and entertainment, rather than spending the money on more staple items such as food and health care. While it is hard to put my self in their shoes, it still boggles my mind that they have the choice, and still decide to buy more expensive less nutritious foods, or spend a third of their income on festivals. My economic experience does teach me that eventually their is a law of decreasing marginal utility if consume the same products over and over again, but when it comes to survival I would assume that the rational decision would be to buy as much of a staple food as you can as long it cheaper than other alternatives or other goods such as entertainment. Not only would this aid in health, well-being, but it would have more lasting effects such as allowing individuals to work longer and harder if they are well nourished.
I found the sections of Banerjee and Duflo's articles which dealt with savings among the poor and very to be incredibly interesting and very related to my experiences in Nicaragua. In the course of our class in Nicaragua, we spoke with many workers--informal and formal sector, poor and more affluent--who stated that having access to a bank account would greatly help them economically. Banjeree and Duflo mentioned a number of reasons why, in their opinion, poor or very poor individuals may desire a bank account: lack of a safe place to keep money, a need for a strict way to force delayed gratification and a way to guard against future crisis-related (medical emergencies serve as one example) expenses among them (pages 13-17, 22-23, 8-9). Among the individuals we interviewed in Nicaragua, the need for a strict mechanism by which to enforce saving was the most prominent reason for individuals to desire a bank account. Since bank accounts are not readily available in Nicaragua, several NGOs have the void in a number of innovative ways. One NGO we worked with in Nicaragua called “Esperanza en Acción” (http://www.esperanzaenaccion.org/) works with artisans to better price their wares and to produce savings through incentives. The NGO staffers sit down with artisans to draw up realistic and attainable saving plans with the goal being to save a certain amount of money. Once the artisan reaches that amount—with the motivational and emotional support of their fellow artisans—the NGOs matches that saved amount of money, doubling the artisan’s saving. Esperanza en Acción also gives each artisan a small lockbox in which he or she is to store to his or her savings. These lockboxes serve as a safe place to keep money and as a visual reminder of the state savings goal. In this way, artisans are empowered to make decisions for themselves while working towards increasing their economic capability. This model also avoids the problem of “indefensible craving” described on page 22 of the article; by incentivizing saving—the promise of the doubling of one’s savings—the benefits thereof are not an amorphous ideal but a very real and potentially very helpful boost to one’s economic capability. --Scott
One of the common threads I found interwoven throughout the article is the cyclical nature of poverty. The text describes this as the “poverty trap,” or the inescapable cycle that occurs when low income leads to limited investment in education, health, equipment and infrastructure. Banerjee and Duflo discussed a 2004 study of health care quality in Delhi, India. The findings illustrate a large discrepancy of doctors’ competence between the poorest and richest neighborhoods. If individuals in poor neighborhoods are not treated adequately when sick, they are more likely to miss work or school, thus regressing their education or keeping them from increasing their income. Another illustration of the cyclical poverty trap is through the lack of a market for insurance. Banerjee and Duflo describe a form of “insurance” during periods of economic stress that consists of eating less and removing children from school. Taking children out of school limits their intellectual progress, and for impoverished people with already low BMI’s eating less is likely to exacerbate conditions such as anemia. Poor health and education decrease the chances of being able to increase one’s income and advance oneself through education, thus exacerbating the poverty cycle. - Katie Garratt
This article really changes the way one thinks about the economic situation of the poor around the world. It seems like every section I read revealed something I hadn't thought of or wasn't aware of. One thing that struck me as I was reading was the lack of basic infrastructure that many of the people in these countries face. In America when we talk about expanding infrastructure we normally are referring to things like creating new roads or making internet access faster or more widely available. Things like electricity and water rarely come to mind as even the poorest among us typically have access. The article states that in some countries less than 5% of the extremely poor have access to electricity and/or tap water. Without this basic infrastructure there is little hope for them to improve their situation as even the most basic entrepreneurial jobs typically require access to these resources. I also don’t see an easy fix to this problem since constructing pipes systems, power lines, etc. all require huge investment and typically require government involvement. Another problem I found interesting is the problem of business size. One of the first things a person learns in an economics course is that there is typically an optimal size for a business to try to reach where it maximizes it’s returns. If a business is too small or much too large than it becomes much less efficient in production of goods or services. The problem that the poor face is that they lack the capital to grow their business to a larger more efficient size. While micro finance should be helpful in a situation like this, the article states that even in places like India where micro financing operations are very visible they are used infrequently. Most people are unwilling to assume the risk or lack the desire to pursue greater wealth. The most interesting thing about the article to me was the psychological differences between the world’s poor and people in more developed countries. I think often in America we see the stories of the woman in Africa who made a stable life for her and her children after receiving a loan but the story that never makes it in to the media is the reality that many of the world’s poor have never even aspired to have a higher standard of living because they didn’t know it was an option. In developed countries even the poorest have access to a decent education and are taught that through study and hard work they can create a good life for themselves. In many developing countries people have never gone to school or at least one that offers any quality of education and many may never have even met or seen a successful person. I think this reality stresses the fact that there is no single solution to the economic problems of developing countries. You may just be able to throw money at some countries and they will use it effectively to improve the quality of life, for others it may take educating the public on how to best use resources to improve their quality of life before microfinance and other aids will be effective.
B&D point out that many criticize use of power parity exchange rates as "inadequate, infrequently updated, and inapplicable to the consumption of the extremely poor" (3). I found this to be an interesting point looking into how we measure poverty and how results can be skewed one way or another depending on the measure used. B&D note the importance of population factors..ie the impact of large families leading to poverty. Moreover, I find it interesting how large the number of adults in the household is. The analysis of a higher mortality rate in adults and high birthrates reveals the pressures put on the youth in poor societies.
It is noteworthy to look at the amount of money spent on non-essential items such as entertainment. Many poor societies spend a large sum of money on alcohol and tobacco, festivities, and television and the like... it appears, looking at B&D's research, that culture plays a huge role in this struggle. Weddings and religious rituals may take precedent over a meal or two for a family... Also in terms of food, poor societies are not buying the "right calories," according to B&D (7). Perhaps through a better nutritional education, money would not be wasted to such a high degree.
I was intrigued by the statement: "while the poor certainly feel poor, their levels of self-reported happiness....is not particularly low (9). I wondered how Sen would react to this. If we use happiness as a measure of poverty, then how can problems be fixed.
B&D also looks at poor education, lack of access to health care, insurance, and infrastructure, and problems in holding land as problems that must be eradicated. Teachers are unqualified and even private schools seem to be sub-par. There is little health care option in most poor areas and many sicknesses go unreported. Most developing societies also lack the infrastructure to develop properly and those who own land usually don't have the title for it, so it may be seized. There is an endless list of problems with seemingly no solution...
Finally self-control seems to be a big issue that needs to be addressed according to B&G (difficulty saving, family/cultural priorities, desire for entertainment--this does lead to happiness for some--, etc..). If self-control can be gained, it may be possible to fix some of the other issues that seem to be intertwined.
Benerjee and Duflo present an insightful view into the day to day lives of the extremely poor. Throughout their commentary I was able to see that the poor not only spend what little money they had on food, but also on entertainment. This was surprising to me and it brought up many questions. For example, they explained that “spending on festivals is an important part of the budget for many extremely poor.” To most of us, it is difficult to understand the choice of entertainment over the obvious nutritional value of more food. When I first looked at the choice I thought that my decision would be similar to Justin’s suggestion of buying more food instead of spending it on luxury festivals and other entertainment. However when I took a closer look I saw that the article suggested that “the extremely poor do not feel an extra compulsion to purchase more calories.” This seems to suggest to me that the people in extreme poverty believe that their mental happiness and well being is equally important to their physical well being. While there is no way to measure the benefit of the entertainment on mental happiness, it is obvious that this is a priority for the extremely poor and that it must provide some benefit to their lives.
Banerjee and Duflo's insight into the lives of the poor was an eye opening look at a segment of the population most people know about, but do not really understand. I found it interesting that Banerjee and Duflo's findings contrasted the widely held beliefs that almost all money goes towards food and that the very poor are unhappy. Saving seems to be difficult for the poor, especially when they express the same temptations that those with money have: to spend it. The only difference is that if they want to indulge in non-necessary purchases, they must cut out a larger percentage of what they earn. I found it interesting that Banerjee and Duflo brought up the idea of efficiency and how the small-scale nature of the working poor's businesses was actually inefficient. While an economist must consider this and it is indeed the truth in this case, it seems to me that the poor find themselves in a game theory-like situation, where they are not willing to give up their choice even if there was an option that, if all chose it, could benefit everyone. Furthermore, the incentive to cheat would be high. I am surprised that Banerjee and Duflo did not look at the continued education of poor children as an opportunity cost to the family. Had the authors provided some data on youths in the labor force, they might have been able to conclude that families are essentially losing money by keeping their children in school, particularly those who work in agriculture. Overall, however, the paper provided a useful insight into a world not many know much about, and can prove very useful when making policy decisions regarding the poor.
I found Banerjee and Duflo's section on lack of specialization amongst the poor particularly interesting. Poor or extremely poor people in their study tended to hold multiple jobs across several countries,with the exception of urban South Africa, Panama, Timor Leste and Nicaragua. The jobs often included entrepreneurial activities, food carts, tailoring jobs, jewelery making, and more, as well as, migrant jobs.
As the authors point out,it makes sense for the poor to engage in risk spreading by not specializing in a certain skill. Another element is that specialization requires an investment in terms of time if not money. Learning a trade takes time, and apprentices are often unpaid or underpaid. Specialization may require further schooling, which costs money if not subsidized by government programs. The poor are unlikely to invest in a skill which may not be marketable at certain times. Therefore, they are caught in a trap of necessarily obtaining unskilled and thus lower paid jobs, but ensuring that a job will almost always be available. Investing in specialized skills will set the poor further back if that skill becomes obsolete or if the market is already flooded with skilled laborers in that field. Thus even with government subsidized higher education or vocational training, the poor may not choose to engage in specialization. This issue creates important policy questions.
Benerjee and Duflo's section on why the poor only leave home for short periods of time stuck out to me. This humanizes poverty to me, by showing that even extremely poor people want to be close to their social network of family and friends even at the cost of potential employment. The benefit they would get from the extra money is not worth the cost of leaving all that they know. Perhaps this is out of fear or something else, but I think it is a basic human instinct to want to stay where you are known. The seemingly small percentage spent on food also points to this. Yes, maybe purchasing more food would make the poor healthier, but spending money on a wedding or festival makes them more human. At some point, basic needs are not enough to survive on. A person needs more than just food.
What struck me most from this article was the lack of a concrete answer and the levels of complexity in understanding how the poor live. Banerjee and Duflo do an excellent job of really studying the various aspects of the economic life. After reading the beginning of the article, specifically on how money is both spent and earned, I thought the logical solution would be something like we discussed in class on Tuesday: microfinance projects to help loan the poor money to get them on their feet in the business world. I can't argue with Banerjee and Duflo in that the inefficiency of work habits, such as lack of specialization and only short-term migration, leads to much less money earned. However, the more I read, I realized that the situation in these countries is much more complicated. What continually stuck out to me was the poor family's inability to save. Granted, a bank account is hard to come by in these impoverished regions; but cut out tobacco and its related products, invest more wisely in food choices, and don't spend as much on festivals, and more money can be spent on health care, education, and well-being. This is why Banerjee and Duflo's article is so compelling--they note that it's not that easy. You can't teach people what is economically practical and expect that to solve everything. It ultimately comes down to studying the human psyche. What matters to them is culture, and the feelings of inadequacy that haunt the poor mind. Thus the real question becomes: what can we do to change the way these people think and perceive themselves? Maybe little can be done, but I'm curious to see how psychologists and economists could work together to solve this problem.
Economics is widely known as the study of choice. One of the greatest accomplishments of this article is that it thoroughly analyzes the multitude of choices the poor and extremely poor make to determine how they will live under their constraints. When the article discussed the poor spending money on “luxury” items like sugar, wheat, alcohol, tobacco, weddings, and festivals that information was not extremely shocking. Humans do not live just to survive, we are emotional and even when living under dire conditions we still want to make ourselves happy. I know this isn’t quite the same scenario, but even in America people choose to go hungry and keep their figure rather than have a full stomach. The point there is that the positive emotions of looking like you want overpower the physical costs of that decision. I was also not surprised at the lack of spending on health/medicine and education. The poor are likely to get sick while living in a society with limited access to clean water or proper sanitation. Also, many of healthcare providers are unqualified and can actually do more harm than good. When it comes to education the public schools are free, and the private schools have less qualified teachers. The choices made under these constraints are logical in my opinion.
However, like many of my peers I was completely baffled when the article discussed temporary migration and the lack of specialization. I simply wrote a big “WHY?” next to the page when I was reading this. Some of the reasons I could imagine were actually later discussed in the article. The argument about limiting risk by diversifying one’s occupations was valid, but the reasons to not migrate longer were not that logical.
On p. 23 the article states, “The ultimate reason seems to be that making more money is not a huge priority.” That would have to be the explanation, because that correlates with their decisions. I was intrigued to learn while the poor feel poor their self-reported happiness wasn’t particularly low. I believe better infrastructure, access to healthcare and education, property rights, and credit through programs like microfinance would enhance the well being of the poor. But honestly, I see them as content (as content as you can be under their situation) making decisions and choosing what to and what not to sacrifice under the constraints they live in.
For the extremely poor societies, it seems that every day is a gamble for them. They must make decisions about whether to spend money now to avoid risk or save it for future uses. Their occupational choices include starting a small business as an entrepreneur which requires borrowing money (also very risky) or working multiple jobs, both containing little definitive outcomes. With education (if it is even a consideration within their families) they have to decide if they want to send their children to the destitute and poorly managed public schools or keep them at home to hopefully help assist the family. If sickness arises, should they pay the extra money to seek potentially more hazardous medical attention or wait for the illness to subside and let nature take over? In many of these cases, neither outcome would prove to be the most beneficial and most are more detrimental to the family as a whole.
Since they are still human beings, they have many wants to make them seem like they are living a regular lifestyle but are hindered by too many constraints. They choose to spend money on frivolous items like televisions instead of survival assets like food. They are also heavily influenced by their cultures and rarely think twice about allocating large sums for one event they considered more important than surviving from day to day.
If only they had some advice or direction to guide their decisions, their lifestyle could be enhanced to a livable level and their stress reduced. Unfortunately, this is the lifestyle they've only ever known and therefore they would not be very willing to change it. In the end, they will continue to live an unguided life because they are blind-sighted by their wants rather than needs, monetary constraints, and cultural values.
The article was a great introduction to some of the problems that the worldly "poor" face. The most interesting section was the study of how the poor allocate their limited budget. I was not surprised about the alcohol and tobacco expenses but I found that the correlation between festivals and entertainment caught my attention.
It is very true that there is a large emphasis on religious festivals and ceremonies in India. As I was raised in an Indian family, we save money for certain events like these. Because of the strong religious ties, especially in Udaipur (Southern India), entertainment is replaced with festival spending. This correlation promotes the idea of the impact of cultural norms on economic spending. Technology is much more expensive in third world countries to begin with, so it would naturally be harder to obtain a TV or radio than it would be for poor in the US.
When Banerjee mentions how the poor's "self-happiness" rates were not as low as expected, I was also curious if this is a cultural phenomenon. In India, the concept of duty, is widely held and followed and the caste system, even though removed, is still known to exist in rural, poor areas.
I would like to read more about why they choose not to specialize or migrate to look for work.
I think that because many among the extremely poor have been raised in societies where a hand to mouth existence is the only way of life, it is understandably more difficult for them to make the economic decisions that will benefit them most in the long run. Because the extremely poor are heavily influenced by their upbringing as well as the other people in their socioeconomic class, it seems they are more inclined to handle their finances like everyone else they know, valuing concrete results in the present over the potential future benefits of saving and investment. The power of influence of the rest of the community over how individuals in poor societies earn and spend money is exemplified in how many of the women of Guntur shared the same routine of cooking dosas in the morning and selling other goods in the afternoon.
Even though Banerjee and Duflo point out that some of the extremely poor may have the economic tools to improve their quality of life, those tools are useless if the poor don't know how to use them. I definitely agree with the idea that these people are in need of the type of guidance that would bring about a complete paradigm shift in the way they view money, prioritize their spending, and accumulate capital.
Through careful analysis, I felt Banerjee and Duflo shed a profound light on the world of extreme poverty. Not only did I get a glimpse of the lives of the poor, but I also gained insight about the causes of abject poverty. I feel that the most significant factor impeding the poor's advancement is their inability to allocate their financial capital wisely. I did not realize that, on average, the impoverished spend over 4% of their income on alcohol and tobacco and 7% on sugar (6). While I understand that these "luxuries" provide some form happiness, they are excessive. As a result, those in extreme poverty do not allocate enough financial capital to durable goods. Banerjee and Duflo refer to these goods as productive assets (8), which would help them expand their businesses and earn more income. While there are many factors contributing to the poverty trap, I believe that a lack of basic financial savvy is one of the root causes. This problem, however, can be mitigated by improving the education systems in these countries. Schools in impoverished areas are few and far between, and these schools lack funding, dedicated and knowledgeable teachers, and strong attendance (10). I believe that a decent education will better equip the poor to deal with the challenges of escaping poverty.
I can see why the Banerjee and Duflo article has had such an impact on the study of Development Economics. In the earlier section of the article, Banerjee and Duflo talked about what the data showed about what the poor/extreme poor were spending with their $2.16/$1.06 per day income. I found their marginal propensity to consume not all that radically different than, say, the average Chinese citizen. Though they clearly had a much larger portion of their budget devoted to subsistence-level nutrition, the poor/extreme poor represented in the data allocated rather large portions of their budget towards entertainment (varying from festivals to TVs) as well as such things as alcohol tobacco. I found that as quite an eye-opener, considering how vital each bit of their budget is for both their survival and livelihood. However, I say this as both a fairly well-educated individual planning to major in economics (the science of decision-making), so I can't expect the people represented in this data to come to an optimal level of consumption, savings, investment, etc. Additionally, I have not experienced what the conditions are like for the people represented by the data, which also vary widely in both culture, family circumstances, and peer pressure (such as trying to not look poor in comparison to one's neighbor, which the article touched on with an anecdote). However, it would be interesting to see how simple, but powerful actions taken by the government could help change their situations around. For example, one of the reasons the article gave which seemed to affect the savings rate was that of a real sense of insecurity. Scott mentioned above that a simple lock-box has appeared to had a positive psychological impact on the individual's savings rate. I would find it interesting if a government created incentives for banks or other such institutions to offer more affordable and attractive loans and accounts. The steps the government might take might include reduced taxes or something. However, the psychological impact of not having the extra money immediately at hand but also knowing that it is secure would certainly be interesting to see. This also brings me to the one thing that I notice throughout the article, rule of law seems to quite weak, if present at all, in the 13 countries surveyed. The picture painted by the article seemed to be one of household with little confidence in anything other than themselves and what they can accomplish in the short-term. Institutions (government or otherwise) seemed either ineffective (such as schools), harmful (such as some health-care institutions), or ones that did not provide enough of an incentive to appeal to most of the poor (such as many of the lending institutions). It clearly seemed as if the only thing that seemed to not cost them in terms of risk and the time they cans spend with their family was to rely on their ability to endeavor on not so productive entrepreneurial activities, which amounted to a bunch of odd jobs. This ultimately has not allowed many in the survey to specialize or employ the full capabilities of themselves, their assets, and each other. The situation, though tough, seemed to have enough opportunities for improving one's situation. However, one solution lies in more effective education and training. Drawing from my China's modern economy course, training people to treat basic wounds/ailments, administering drugs, and other basic medical needs could greatly help reduce mortality rates. Changing the educational system so that it is more oriented in teaching more practical lessons in life, such as farming, could have a much more effective impact on the lives of the poor. ...
I can see why the Banerjee and Duflo article has had such an impact on the study of Development Economics. In the earlier section of the article, Banerjee and Duflo talked about what the data showed about what the poor/extreme poor were spending with their $2.16/$1.06 per day income. I found their marginal propensity to consume not all that radically different than, say, the average Chinese citizen. Though they clearly had a much larger portion of their budget devoted to subsistence-level nutrition, the poor/extreme poor represented in the data allocated rather large portions of their budget towards entertainment (varying from festivals to TVs) as well as such things as alcohol tobacco. I found that as quite an eye-opener, considering how vital each bit of their budget is for both their survival and livelihood. However, I say this as both a fairly well-educated individual planning to major in economics (the science of decision-making), so I can't expect the people represented in this data to come to an optimal level of consumption, savings, investment, etc. Additionally, I have not experienced what the conditions are like for the people represented by the data, which also vary widely in both culture, family circumstances, and peer pressure (such as trying to not look poor in comparison to one's neighbor, which the article touched on with an anecdote). ...
However, it would be interesting to see how simple, but powerful actions taken by the government could help change their situations around. For example, one of the reasons the article gave which seemed to affect the savings rate was that of a real sense of insecurity. Scott mentioned above that a simple lock-box has appeared to had a positive psychological impact on the individual's savings rate. I would find it interesting if a government created incentives for banks or other such institutions to offer more affordable and attractive loans and accounts. The steps the government might take might include reduced taxes or something. However, the psychological impact of not having the extra money immediately at hand but also knowing that it is secure would certainly be interesting to see. This also brings me to the one thing that I notice throughout the article, rule of law seems to quite weak, if present at all, in the 13 countries surveyed. The picture painted by the article seemed to be one of household with little confidence in anything other than themselves and what they can accomplish in the short-term. Institutions (government or otherwise) seemed either ineffective (such as schools), harmful (such as some health-care institutions), or ones that did not provide enough of an incentive to appeal to most of the poor (such as many of the lending institutions). It clearly seemed as if the only thing that seemed to not cost them in terms of risk and the time they cans spend with their family was to rely on their ability to endeavor on not so productive entrepreneurial activities, which amounted to a bunch of odd jobs. This ultimately has not allowed many in the survey to specialize or employ the full capabilities of themselves, their assets, and each other. The situation, though tough, seemed to have enough opportunities for improving one's situation. However, one solution lies in more effective education and training. Drawing from my China's modern economy course, training people to treat basic wounds/ailments, administering drugs, and other basic medical needs could greatly help reduce mortality rates. Changing the educational system so that it is more oriented in teaching more practical lessons in life, such as farming, could have a much more effective impact on the lives of the poor.
I am sorry for the above paragraph, as it is a rather lengthy string of ideas which came to mind in a rather incoherent way. However, I find this article interesting in how it has taken the data and drawn conclusions that show that each country/province/city has different factors that affect the decisions of the poor/extreme poor. Yet, the article also shows that there appear to be some common themes across the different examples, namely the fact that specialization is often absent in some sense, savings is a clear issue, long-term migration is largely not utilized, and money is spent somewhat impulsively. Yet, the poor people surveyed appeared much happier than those making many time more money than they are. I am interested to continue to expand on these ideas and to look at more data.
To expand upon the idea of the cyclical nature of poverty that Katie discusses above, I believe one of the driving forces behind this pattern is the interconnectedness of the institutions and components that comprise the daily lives of the poor. I found one of the strengths of Banerjee and Duflo’s paper to be the breadth of issues and data which were combined and presented to give a larger picture of the complexity of the causes of poverty. The volume and diversity of data utilized from measurements of spending patterns, work, health, education, quality of infrastructure, and access to essential markets both highlighted individual causes and demonstrated that no aspects of poverty are truly isolated from other influences. The domino effect that results from one shortcoming or failure in the decisions of or resources available to the poor can and does have potentially devastating results from which recovery is exceptionally difficult. It seems that the cards are so often stacked against the poor that this is no room for them to maneuver and attempt to overcome their problems when a stretch of bad luck is encountered. This sentiment is undoubtedly demoralizing and ultimately seems to be where the authors arrive in the final paragraph of the paper to explain the apparent lack of motivation towards increasing income.
I find this interconnectedness of the aspects behind the lives of the poor somewhat daunting when looking toward potential ways to alleviate poverty. As my interest and experiences are primarily within the world of healthcare, I was interested in the authors’ analysis of the health of and healthcare institutions available to the poor. As Banerjee and Duflo discuss and allude to, the health of an individual is affected not only by their access to healthcare and the quality of healthcare institutions but also by their nutritional habits, living conditions, work, public infrastructure, and social network. To effectively improve the health of a poor individual, it is often not sufficient to simply visit a physician; rather, several fundamental changes to the different aspects and institutions in an individual’s life must be enacted for the full benefit of having access to consistent, quality medical services to be realized. - Greg Kurkis
Banerjee and Duflo's details on developing nations lack of adequate communication, financial, and transportation infrastructure helps to explain much of the rationale surrounding decisions made by the poor. In the US and other developed nations, strong infrastructures underpin vibrant economies and attract both foreign and domestic investment seeking returns within an established market. Developing nations however, lack this infrastructure as highlighted by Banerjee and Duflo and as such struggle to attract the equity (not just credit) required to build stable businesses. The lack of adequate infrastructure and by extension the limited economic choices faced by the poor, not surprisingly manifest as increased migration, lack of specialization, lack of an adequate banking system, lack of a virtuous educational cycle (better education makes better teachers makes better education), etc.
While I agree that infrastructure develops alongside an economy and not in front of it, technological improvements allow for infrastructural inroads requiring an ever decreasing amount of capital (think cell phones over landlines for example) which if properly leveraged can dramatically cut down the amount of time infrastructure takes to develop. Unfortunately, truly poor developing nations do not have the luxury of an established market to attract such infrastructural investments at the current time. Instead (and I found this to be particularly interesting) it seems that in certain cases, the impoverished maintain an ability to innovate themselves out of infrastructural dilemmas such as creating groups that pool savings and offer loans from their existing savings base (15). In this case, not only are participants extending credit within their community, but they have the market knowledge and relationship to recognize and deem credit worthy investments. In cases such as these, improvements in communication infrastructure (radios for example) can expand these organic solutions allowing for more rapid and widespread development with transportation infrastructure following.
In summary, Banerjee and Duflo’s paper, while broad in scope, demonstrated quite clearly that the poor are neither hopeless nor irrational, but instead face a limited set of choices given their constraints. Indeed many of these constraints are infrastructural in nature and as such, creative measures that address these problems should constantly be encouraged in order to broaden options. Considering basic infrastructure can be installed in the near term, more dynamic infrastructural solutions will undoubtedly follow.
Banerjee and Duflo’s work examining the economic lives of the poor explained the behaviors and living conditions those living on under $1 or $2 per day, creating an enlightening and thought provoking article demonstrating the multi-faceted complexity of poverty. Perhaps because we often take our education for granted or because education is often viewed as a means to rise out of poverty, I was particularly interested to learn about the educational situation among the poorest of the poor. Though most children in the thirteen countries in the studies attended school and the rates of education appear fairly high - at least 50 percent of both boys and girls aged 7 to 12 in extremely poor households are in school in all but one of the thirteen countries studied - the quality of instruction is poor and results from schooling are almost nonexistent. Rampant teacher absenteeism plagues the developing world, as the average absence rate among teachers is 19 percent, a statistic which fails to capture the quality of instruction when the teacher is actually present. This points to governmental infrastructure problems that are not easily fixable. Although private schools perform better according to absenteeism statistics, their sometimes prohibitively high costs along with unqualified instructors may not provide a better alternative to public schooling. One of the most striking statements for me was when Banerjee and Duflo explained that parents may not know if their children can read or the extent of their academic capabilities because they themselves are illiterate. Children lack basic reading, writing, and arithmetic skills. As discovered by a nationwide study conducted in India, although 93.4 percent of children ages 6 to 14 are enrolled in school, 34.9 percent of children age 7 to 14 cannot read a simple paragraph at a second-grade level. By acquiring a fundamental skill set, people would be qualified to obtain higher-skilled jobs and thus earn a higher income, raising their standards of living and perhaps enabling them to emerge from the poorest of the poor to more prosperous lives. Even areas that on the surface appear to be in better condition and report favorable statistics, such as education compared to access to credit, when examined, are not so. This is especially deplorable in the field of education, which could give children the knowledge and tools to excel and imagine lives beyond their impoverished backgrounds.
A number of things really struck me struck me in this article, but because I am especially interested in education and aspects of human development, the discussion of education and financial and social stress interested me the most. I was not at all surprised that Banerjee and Duflo found that the poor report being under a lot of financial and psychological stress. When thinking about disadvantaged populations, I certainly consider financial difficulties, but not on a level as specific as spending per calorie, for example. Another financial burden they face is in saving. Not only do the poor have little saved in the first place, but there is also the aspect of the safety of saving their money, as well as protecting it from inflation. While the authors found that the poor do not show low self-reported happiness and health levels, I would think that under economic stress, when a "form of 'insurance' is often eating less" (16), there health would suffer, and therefore the poor would, in fact, self-report lower health levels. My other concern was the education of the poor. It is a well-known fact that there is a disparity in the educational opportunities between different socio-economic groups. It is unfortunate that public schools in these poor communities are often found to be dysfunctional and that families are opting to pull there children out in favor of paying for private school. Even then, however, a better education is not even guaranteed.
While Banjerjee and Duflo touch on a myriad of topics relating to the lives of the severely impoverished, one thread of commonality that seems to tie the many different facets together is the cyclical nature of poverty itself. For instance, the authors make a great point about why the poor don't invest more in education. They suggest that this lack of sufficient investment is not because the poor do not value education but rather because in many cases poor parents are uneducated themselves and thus fail to see the low returns to education provided by their current school systems. In many poor countries this creates a cycle of illiteracy that is very difficult to break and is very detrimental to human capital.
The authors bring to light another example poverty's cyclicality through their discussion of the prevalence of entrepreneurs in poor countries. In many countries the poor run small, often inefficient businesses. Often times the entrepreneur will solely employ members of his or her family. As the authors point out, this makes job creation for others almost nonexistent. With little or no job creation the only means of making a living is through menial jobs in these types of inefficient firms, yet again creating a cycle this is detrimental to the overall economic health of poor countries.
In my opinion, the most important contribution of Banerjee and Duflo does not lie in the descriptive nature of their work but rather in how the authors effectively provide a basis for analysis of the limited set of choices that the poor face. Take the example of education. As Emily Darling mentioned, there are incredible disparities in educational opportunities between different socio-economic groups and even between gender and ethnic groups. A good way to explain why these inequalities in education exist is by analyzing the choices or options that a poor person in Mexico, for example, has. In a country like Mexico, many poor parents decide to pull their children out of school because it is more beneficial for the household to have their children working and generating income rather than attending school. In economic terms this means that the opportunity cost of going to school is much higher than the opportunity cost of pulling out of school. In the words of Banerjee and Duflo “the poor are trading off opportunities to have higher income.” This is a problem. But, how do we solve this? In my previous example, a way to promote education would be by creating incentives that decrease the opportunity cost of going to school. Conditional cash transfers (CCT) are a good example of this type of incentives. CCT are small amounts of money that are transferred by the government to poor households in return for enrolling children into public schools, or taking them to health centers. These programs have been very effective in countries like Brazil, Mexico and Chile and have proved to address the problems that Banerjee and Duflo describe. Evidently, CCTs alone will not solve the problem of poverty and inequality. There needs to be also a system of infrastructure that supports these initiatives. Banerjee and Duflo do a very good job in not only in explaining the limited set of choices of the poor but also in describing the problems in infrastructure that keeps poor countries away from growing and developing. One of my main goals this term will be to understand how to improve the infrastructure of poor countries when governments lack the capital to finance new growth initiatives.
Clearly, extensive work went into publishing this paper on the lives of the poor and it effectively serves to give a great overview of the hard lives the extremely poor live. In the spirit of what we discussed in the first day of class about the vague study of “developmental economics,” I think this article goes to show the difficulties of the study in general. There is no universal economic model to solve the economic problems in developing countries. Banerjee and Duflo’s ability to remove themselves from the nature sympathy towards these people and consider it realistically from all angles really enhances the significance of their findings. The way the paper progresses from summary, to analysis, into questioning the decisions of the poor is done perfectly. They show how each problem needs a solution specialized for the specific people it is geared towards helping.
The diversity of countries and societies sampled in the paper highlights the importance of understanding the culture of a group of people before making any sort intervention. I was struck by the country-to-country differences in spending habits on vital needs such as food, education, and healthcare; not to mention the contrasting spending habits on discretionary items. For too many of these people in deep poverty, the lack of money may be so overwhelming that the concept of saving such menial amounts goes by the wayside. The patience and self-control need to watch their saving development might just be nonexistent. This lack of financial discipline is one reason why the limited access the extremely poor have to credit can sometimes create problems in the long run. The blame for this should be put both ways. Issues of careless lending to prospective borrowers who are not prepared to invest the money properly must exist when dealing with loans that are relatively so small. There is a significant amount of moral consideration needed in the business of microloans. All borrowers want to be successful entrepreneurs however few realize the hard work needed to create a profitability business so after failing to invest loans properly they are stuck with problems repaying the creditors. I believe, access to a proper education and access to credit are the most important issues facing the extremely poor. However, as mentioned above, it is not as simple and placing a few schools and banks in all of these communities. At the crux of the problem is how each specific society functions and it is made very apparent in the first section of the paper that these societies are incredibly different while all faced with the fundamental issue of extreme poverty. Only after full understanding the inner workings of the cultures will any of these aid programs be able to flourish and properly enhance the standard of living for the extremely poor.
There are a few points that I would like to touch on in response to this article and yalls posts, the first being spending habits. I agree with Allison who, earlier, says that a person needs more than just food. (I know that other people shared this mentality, but I wrote down Allison’s comment first.) My thoughts are that it is not enough just to survive physically; you must endure mentally as well. Coping with the mental aspect of extreme poverty, I argue, is probably more difficult than the physical one and I believe that culture and community help people endure poverty. Having musical and religious activities brings people of the same environment together, which not only gives them a community, but also gives them people on which to depend. Secondly, I believe that the presence/absence of Democracy plays an important role in how effective a country is at establishing sufficient education, property rights institutions, and contracting institutions; all of which are vital in alleviating poverty. Education is importing in a few ways. Obviously, it gives the poor the tools (reading, writing, understanding the function of government, specialization, and others) required to improve their lives. (Just a side note on specialization: While specialization is enormously efficient, it can only arise to its economic potential through adequate education. In the context of occupational specialization, an increased portion of the workforce that specializes in their particular profession causes the economy to develop into sectors that produce goods more efficiently. Employees specialize in the products that they manufacture with the least opportunity cost, which expands the production frontier as well as lowers the costs of production. This effect also causes workers to think for themselves. When work is specialized, employees group into unions that fight for better working conditions. Labor unions promote democracy because they require collective action and demand representation of their interests.)
The article is thought provoking and one that I believe to be a good first look at poverty in its relation to development economics. It is very interesting to see the percentage comparisons between different countries, and see how their priorities influence their lifestyles and basic resource allocation. I find it interesting to see nations relatively advanced in some categories, yet severely lacking in others. One of the main things I was able to take out of this reading is that there is hope. With some changes in their business model and overall approach to specialization, there seems to be a great deal of room for re-organization and potential growth. With the proper infrastructure and the rooting of business friendly institutions I believe that the figures 20 years down the road will be drastically improved.
@Thomas: Thanks for your comment, I basically agree with all you said, I find your point on democracy particularly interesting. I agree with you that an efficient and functioning democracy can help to alleviate people out of poverty, but oftentimes, especially in developing countries (sometimes even in developed countries, see Singapore, which has a flourishing economy under dictatorship) non-democratic regimes are as efficient as (Western) democracies in promoting economic growth. If you look at China and India as two comparative examples, the Central Chinese government has been doing a better job in driving up China's economy than the Indian democratic government for India's economy, partly due to the overwhelming power of the central government in Beijing and its efficient implementation processes of economic reforms (no long voting and persuasion processes or extensive bureaucratic procedures) Don't get me wrong, I am a convinced supporter of democratic regimes in most cases, but democratisation of developing countries can go very wrong not just politically, but also economically and we should not disregard the sometimes very efficient measurements of nondemocratic governments in enforcing economic reforms for their countries and people. Here, I am only speaking about the successful economic policies of some autocratic or one-party regimes, bearing in mind that political freedom is equally (or even more?) important to the people and are deliberately oppressed by these systems, which I strongly oppose.
Banerjee and Duflo’s “The Economic Lives of the Poor” touched on many interesting aspects of extreme poverty. In the process of breaking down the lives and habits of people who survive off of about $1 per day a few statistics stood out in particular to me. The first statistic that stood out was the percentage of money spent on items that are not necessary to survival. The fact that these people spend 15% of their budget on festivals, alcohol and tobacco was shocking. One would assume that more money would be spent on food, especially because of the high rates of malnutrition and below recommended calorie intake. The second point I found interesting was the lack of specialization. These impoverished people are stuck within a cycle of poverty with little to no chance of advancing themselves. People in these areas spend practically nothing on education and eventually drop out of school long before finishing their education. Due to lack of training and education, these people lack the skills to specialize in any particular areas. Because of this they work several different temporary jobs that offer no stable support or future improvement. The combination of inefficient use of money and lack of skills and education solidify this cycle of poverty. What this cycle reminded me of is the cycle of chronic homelessness. The majority of these homeless suffer from mental illness and/or addiction. The factors that cause these cycles are different between the homeless in America and the extremely poor elsewhere in the world, but the two groups suffer from similar issues. The issues of inefficient spending and lack of specialization are two major factors in the cycle of poverty and homelessness. One last similarity is the difficulty and uncertainty of how to help the homeless and impoverished. As I was reading this paper, I kept being reminded of homeless and the problem of homelessness in America.
I really enjoyed reading Banerjee and Duflo's article, as I thought they did a good job of getting behind the psyche of the severely impoverished. I particularly enjoyed the final section where they analyzed the poor's decisions; "Understanding the Economic Lives of the Poor" answered many of the questions I had when reading earlier sections of the paper. In that section, the discussion on why poor people don't specialize in their jobs particularly struck me. The popular criticism that the poor are lazy or lack a strong work ethic does not stand up to Banerjee and Duflo's findings. Whether or not holding multiple jobs is the best method for long term economic success may be questionable, but the workers determination to find secondary employment rather than sit idly is admirable.
ReplyDeleteI was also particularly interested in the authors' discussion of the role a lack of secure banks plays in development prospects. Until Prof Casey mentioned this in class on Tues, I had not thought about how not having a secure place to put savings can damper the incentive to save. I had heard about how the poor have difficulty getting loans because of bad credit and high interest rates, but hadn't considered that there might not even be an available bank. I hope to learn more about the role financial institutions can play in development prospects during the semester.
Benerjee and Duflo, throughout their entire paper, outline reasons as to why increasing the availability of credit to poor households would help them deal with many of the problems they face and presumably increase their standard of living. The paper mentions the entrepreneurial spirit of many of the poor and includes information on a survey done in West Bengal that found that the median household has three working members with a combined seven occupations. The paper discusses the high cost of credit and the lack of reliable ways to save money and accumulate capital. Also discussed is the idea that the majority of businesses owned by the poor are too small to operate efficiently. After reading about the situation of the poor, it seems obvious that microfinance and a more effective system of making credit available to poor households would solve a lot of problems and increase the economic productivity of the poor. However, Benerjee and Duflo state at the end of the paper that “making money is not a huge priority” for the poor and that they sense “a reluctance of poor people to commit themselves psychologically to a project of making more money” (Benerjee and Duflo 23-24). Up to this point, as an investor I would be willing to explore the option of lending money to the poor, however, my goal would be to see a return on my investment, yet if my debtor lacks the motivation to make more money, why would I make the investment? After hearing the anecdotal stories about the success of many women in operating and expanding their businesses I wonder whether Benerjee and Duflo ignore gender when they make their statements that the poor are reluctant to make the effort to make more money. The two examples they give supporting the idea that the poor do not try and make more money are the reluctance of the poor to migrate for longer periods of time to higher wages and the reluctance of farmers to purchase fertilizers. In both of these cases, men are the ones lacking the effort to earn more income as the men are the ones who would migrate and the men are the ones who would purchase the fertilizer. Therefore I wonder if a study done where women are given the opportunity to earn more income would refute the idea that the poor in general are reluctant to try and increase their income.
ReplyDeleteTwo things really stood out in the article that seemed astounding to me. The first was that 'micro-loans' appeared to have residual effects beyond pro sucessfull viding capital to individuals living in these standards of poverty. Of course, the main purpose of these loans would be to issue capital to families so that they could pursue their entrepreneurial interest and make their operations more efficient thereby creating a steady future stream of cash flows that could allow the family to support itself. But at the same time, the article mentions the fact that these micro-loans appeared to have effects on personal savings of families in poverty. Throughout this report, numerous times the author highlights the fact that individuals and families intend to save for medical emergencies and time of famine, but end up spending their excess savings due to multiple social failures such as a lack of savings institutions. To counter this problem, the author points out on page page 15 of the article that micro-credit entices individuals to save rather than spending all of the money that they have at that moment in time. By making these micro-loans, it essentially required the credit receivers to make wiser and more rational decisions when thinking about their income, and luxury spending.
ReplyDeleteThe other interest point that came to my attention was the fact that a large percentage of these poverty stricken populations and communities spent money to buy luxury goods and entertainment, rather than spending the money on more staple items such as food and health care. While it is hard to put my self in their shoes, it still boggles my mind that they have the choice, and still decide to buy more expensive less nutritious foods, or spend a third of their income on festivals. My economic experience does teach me that eventually their is a law of decreasing marginal utility if consume the same products over and over again, but when it comes to survival I would assume that the rational decision would be to buy as much of a staple food as you can as long it cheaper than other alternatives or other goods such as entertainment. Not only would this aid in health, well-being, but it would have more lasting effects such as allowing individuals to work longer and harder if they are well nourished.
By: Justin Donati
I found the sections of Banerjee and Duflo's articles which dealt with savings among the poor and very to be incredibly interesting and very related to my experiences in Nicaragua.
ReplyDeleteIn the course of our class in Nicaragua, we spoke with many workers--informal and formal sector, poor and more affluent--who stated that having access to a bank account would greatly help them economically. Banjeree and Duflo mentioned a number of reasons why, in their opinion, poor or very poor individuals may desire a bank account: lack of a safe place to keep money, a need for a strict way to force delayed gratification and a way to guard against future crisis-related (medical emergencies serve as one example) expenses among them (pages 13-17, 22-23, 8-9). Among the individuals we interviewed in Nicaragua, the need for a strict mechanism by which to enforce saving was the most prominent reason for individuals to desire a bank account. Since bank accounts are not readily available in Nicaragua, several NGOs have the void in a number of innovative ways. One NGO we worked with in Nicaragua called “Esperanza en Acción” (http://www.esperanzaenaccion.org/) works with artisans to better price their wares and to produce savings through incentives. The NGO staffers sit down with artisans to draw up realistic and attainable saving plans with the goal being to save a certain amount of money. Once the artisan reaches that amount—with the motivational and emotional support of their fellow artisans—the NGOs matches that saved amount of money, doubling the artisan’s saving. Esperanza en Acción also gives each artisan a small lockbox in which he or she is to store to his or her savings. These lockboxes serve as a safe place to keep money and as a visual reminder of the state savings goal. In this way, artisans are empowered to make decisions for themselves while working towards increasing their economic capability. This model also avoids the problem of “indefensible craving” described on page 22 of the article; by incentivizing saving—the promise of the doubling of one’s savings—the benefits thereof are not an amorphous ideal but a very real and potentially very helpful boost to one’s economic capability.
--Scott
One of the common threads I found interwoven throughout the article is the cyclical nature of poverty. The text describes this as the “poverty trap,” or the inescapable cycle that occurs when low income leads to limited investment in education, health, equipment and infrastructure. Banerjee and Duflo discussed a 2004 study of health care quality in Delhi, India. The findings illustrate a large discrepancy of doctors’ competence between the poorest and richest neighborhoods. If individuals in poor neighborhoods are not treated adequately when sick, they are more likely to miss work or school, thus regressing their education or keeping them from increasing their income.
ReplyDeleteAnother illustration of the cyclical poverty trap is through the lack of a market for insurance. Banerjee and Duflo describe a form of “insurance” during periods of economic stress that consists of eating less and removing children from school. Taking children out of school limits their intellectual progress, and for impoverished people with already low BMI’s eating less is likely to exacerbate conditions such as anemia. Poor health and education decrease the chances of being able to increase one’s income and advance oneself through education, thus exacerbating the poverty cycle.
- Katie Garratt
This article really changes the way one thinks about the economic situation of the poor around the world. It seems like every section I read revealed something I hadn't thought of or wasn't aware of. One thing that struck me as I was reading was the lack of basic infrastructure that many of the people in these countries face. In America when we talk about expanding infrastructure we normally are referring to things like creating new roads or making internet access faster or more widely available. Things like electricity and water rarely come to mind as even the poorest among us typically have access. The article states that in some countries less than 5% of the extremely poor have access to electricity and/or tap water. Without this basic infrastructure there is little hope for them to improve their situation as even the most basic entrepreneurial jobs typically require access to these resources. I also don’t see an easy fix to this problem since constructing pipes systems, power lines, etc. all require huge investment and typically require government involvement.
ReplyDeleteAnother problem I found interesting is the problem of business size. One of the first things a person learns in an economics course is that there is typically an optimal size for a business to try to reach where it maximizes it’s returns. If a business is too small or much too large than it becomes much less efficient in production of goods or services. The problem that the poor face is that they lack the capital to grow their business to a larger more efficient size. While micro finance should be helpful in a situation like this, the article states that even in places like India where micro financing operations are very visible they are used infrequently. Most people are unwilling to assume the risk or lack the desire to pursue greater wealth.
The most interesting thing about the article to me was the psychological differences between the world’s poor and people in more developed countries. I think often in America we see the stories of the woman in Africa who made a stable life for her and her children after receiving a loan but the story that never makes it in to the media is the reality that many of the world’s poor have never even aspired to have a higher standard of living because they didn’t know it was an option. In developed countries even the poorest have access to a decent education and are taught that through study and hard work they can create a good life for themselves. In many developing countries people have never gone to school or at least one that offers any quality of education and many may never have even met or seen a successful person. I think this reality stresses the fact that there is no single solution to the economic problems of developing countries. You may just be able to throw money at some countries and they will use it effectively to improve the quality of life, for others it may take educating the public on how to best use resources to improve their quality of life before microfinance and other aids will be effective.
B&D point out that many criticize use of power parity exchange rates as "inadequate, infrequently updated, and inapplicable to the consumption of the extremely poor" (3). I found this to be an interesting point looking into how we measure poverty and how results can be skewed one way or another depending on the measure used. B&D note the importance of population factors..ie the impact of large families leading to poverty. Moreover, I find it interesting how large the number of adults in the household is. The analysis of a higher mortality rate in adults and high birthrates reveals the pressures put on the youth in poor societies.
ReplyDeleteIt is noteworthy to look at the amount of money spent on non-essential items such as entertainment. Many poor societies spend a large sum of money on alcohol and tobacco, festivities, and television and the like... it appears, looking at B&D's research, that culture plays a huge role in this struggle. Weddings and religious rituals may take precedent over a meal or two for a family... Also in terms of food, poor societies are not buying the "right calories," according to B&D (7). Perhaps through a better nutritional education, money would not be wasted to such a high degree.
I was intrigued by the statement: "while the poor certainly feel poor, their levels of self-reported happiness....is not particularly low (9). I wondered how Sen would react to this. If we use happiness as a measure of poverty, then how can problems be fixed.
B&D also looks at poor education, lack of access to health care, insurance, and infrastructure, and problems in holding land as problems that must be eradicated. Teachers are unqualified and even private schools seem to be sub-par. There is little health care option in most poor areas and many sicknesses go unreported. Most developing societies also lack the infrastructure to develop properly and those who own land usually don't have the title for it, so it may be seized. There is an endless list of problems with seemingly no solution...
Finally self-control seems to be a big issue that needs to be addressed according to B&G (difficulty saving, family/cultural priorities, desire for entertainment--this does lead to happiness for some--, etc..). If self-control can be gained, it may be possible to fix some of the other issues that seem to be intertwined.
Benerjee and Duflo present an insightful view into the day to day lives of the extremely poor. Throughout their commentary I was able to see that the poor not only spend what little money they had on food, but also on entertainment. This was surprising to me and it brought up many questions. For example, they explained that “spending on festivals is an important part of the budget for many extremely poor.” To most of us, it is difficult to understand the choice of entertainment over the obvious nutritional value of more food. When I first looked at the choice I thought that my decision would be similar to Justin’s suggestion of buying more food instead of spending it on luxury festivals and other entertainment. However when I took a closer look I saw that the article suggested that “the extremely poor do not feel an extra compulsion to purchase more calories.” This seems to suggest to me that the people in extreme poverty believe that their mental happiness and well being is equally important to their physical well being. While there is no way to measure the benefit of the entertainment on mental happiness, it is obvious that this is a priority for the extremely poor and that it must provide some benefit to their lives.
ReplyDeleteBanerjee and Duflo's insight into the lives of the poor was an eye opening look at a segment of the population most people know about, but do not really understand. I found it interesting that Banerjee and Duflo's findings contrasted the widely held beliefs that almost all money goes towards food and that the very poor are unhappy. Saving seems to be difficult for the poor, especially when they express the same temptations that those with money have: to spend it. The only difference is that if they want to indulge in non-necessary purchases, they must cut out a larger percentage of what they earn.
ReplyDeleteI found it interesting that Banerjee and Duflo brought up the idea of efficiency and how the small-scale nature of the working poor's businesses was actually inefficient. While an economist must consider this and it is indeed the truth in this case, it seems to me that the poor find themselves in a game theory-like situation, where they are not willing to give up their choice even if there was an option that, if all chose it, could benefit everyone. Furthermore, the incentive to cheat would be high.
I am surprised that Banerjee and Duflo did not look at the continued education of poor children as an opportunity cost to the family. Had the authors provided some data on youths in the labor force, they might have been able to conclude that families are essentially losing money by keeping their children in school, particularly those who work in agriculture. Overall, however, the paper provided a useful insight into a world not many know much about, and can prove very useful when making policy decisions regarding the poor.
I found Banerjee and Duflo's section on lack of specialization amongst the poor particularly interesting. Poor or extremely poor people in their study tended to hold multiple jobs across several countries,with the exception of urban South Africa, Panama, Timor Leste and Nicaragua. The jobs often included entrepreneurial activities, food carts, tailoring jobs, jewelery making, and more, as well as, migrant jobs.
ReplyDeleteAs the authors point out,it makes sense for the poor to engage in risk spreading by not specializing in a certain skill. Another element is that specialization requires an investment in terms of time if not money. Learning a trade takes time, and apprentices are often unpaid or underpaid. Specialization may require further schooling, which costs money if not subsidized by government programs. The poor are unlikely to invest in a skill which may not be marketable at certain times. Therefore, they are caught in a trap of necessarily obtaining unskilled and thus lower paid jobs, but ensuring that a job will almost always be available. Investing in specialized skills will set the poor further back if that skill becomes obsolete or if the market is already flooded with skilled laborers in that field. Thus even with government subsidized higher education or vocational training, the poor may not choose to engage in specialization. This issue creates important policy questions.
Benerjee and Duflo's section on why the poor only leave home for short periods of time stuck out to me. This humanizes poverty to me, by showing that even extremely poor people want to be close to their social network of family and friends even at the cost of potential employment. The benefit they would get from the extra money is not worth the cost of leaving all that they know. Perhaps this is out of fear or something else, but I think it is a basic human instinct to want to stay where you are known. The seemingly small percentage spent on food also points to this. Yes, maybe purchasing more food would make the poor healthier, but spending money on a wedding or festival makes them more human. At some point, basic needs are not enough to survive on. A person needs more than just food.
ReplyDeleteWhat struck me most from this article was the lack of a concrete answer and the levels of complexity in understanding how the poor live. Banerjee and Duflo do an excellent job of really studying the various aspects of the economic life. After reading the beginning of the article, specifically on how money is both spent and earned, I thought the logical solution would be something like we discussed in class on Tuesday: microfinance projects to help loan the poor money to get them on their feet in the business world. I can't argue with Banerjee and Duflo in that the inefficiency of work habits, such as lack of specialization and only short-term migration, leads to much less money earned. However, the more I read, I realized that the situation in these countries is much more complicated. What continually stuck out to me was the poor family's inability to save. Granted, a bank account is hard to come by in these impoverished regions; but cut out tobacco and its related products, invest more wisely in food choices, and don't spend as much on festivals, and more money can be spent on health care, education, and well-being. This is why Banerjee and Duflo's article is so compelling--they note that it's not that easy. You can't teach people what is economically practical and expect that to solve everything. It ultimately comes down to studying the human psyche. What matters to them is culture, and the feelings of inadequacy that haunt the poor mind. Thus the real question becomes: what can we do to change the way these people think and perceive themselves? Maybe little can be done, but I'm curious to see how psychologists and economists could work together to solve this problem.
ReplyDeleteEconomics is widely known as the study of choice. One of the greatest accomplishments of this article is that it thoroughly analyzes the multitude of choices the poor and extremely poor make to determine how they will live under their constraints. When the article discussed the poor spending money on “luxury” items like sugar, wheat, alcohol, tobacco, weddings, and festivals that information was not extremely shocking. Humans do not live just to survive, we are emotional and even when living under dire conditions we still want to make ourselves happy. I know this isn’t quite the same scenario, but even in America people choose to go hungry and keep their figure rather than have a full stomach. The point there is that the positive emotions of looking like you want overpower the physical costs of that decision. I was also not surprised at the lack of spending on health/medicine and education. The poor are likely to get sick while living in a society with limited access to clean water or proper sanitation. Also, many of healthcare providers are unqualified and can actually do more harm than good. When it comes to education the public schools are free, and the private schools have less qualified teachers. The choices made under these constraints are logical in my opinion.
ReplyDeleteHowever, like many of my peers I was completely baffled when the article discussed temporary migration and the lack of specialization. I simply wrote a big “WHY?” next to the page when I was reading this. Some of the reasons I could imagine were actually later discussed in the article. The argument about limiting risk by diversifying one’s occupations was valid, but the reasons to not migrate longer were not that logical.
On p. 23 the article states, “The ultimate reason seems to be that making more money is not a huge priority.” That would have to be the explanation, because that correlates with their decisions. I was intrigued to learn while the poor feel poor their self-reported happiness wasn’t particularly low. I believe better infrastructure, access to healthcare and education, property rights, and credit through programs like microfinance would enhance the well being of the poor. But honestly, I see them as content (as content as you can be under their situation) making decisions and choosing what to and what not to sacrifice under the constraints they live in.
For the extremely poor societies, it seems that every day is a gamble for them. They must make decisions about whether to spend money now to avoid risk or save it for future uses. Their occupational choices include starting a small business as an entrepreneur which requires borrowing money (also very risky) or working multiple jobs, both containing little definitive outcomes. With education (if it is even a consideration within their families) they have to decide if they want to send their children to the destitute and poorly managed public schools or keep them at home to hopefully help assist the family. If sickness arises, should they pay the extra money to seek potentially more hazardous medical attention or wait for the illness to subside and let nature take over? In many of these cases, neither outcome would prove to be the most beneficial and most are more detrimental to the family as a whole.
ReplyDeleteSince they are still human beings, they have many wants to make them seem like they are living a regular lifestyle but are hindered by too many constraints. They choose to spend money on frivolous items like televisions instead of survival assets like food. They are also heavily influenced by their cultures and rarely think twice about allocating large sums for one event they considered more important than surviving from day to day.
If only they had some advice or direction to guide their decisions, their lifestyle could be enhanced to a livable level and their stress reduced. Unfortunately, this is the lifestyle they've only ever known and therefore they would not be very willing to change it. In the end, they will continue to live an unguided life because they are blind-sighted by their wants rather than needs, monetary constraints, and cultural values.
The article was a great introduction to some of the problems that the worldly "poor" face. The most interesting section was the study of how the poor allocate their limited budget. I was not surprised about the alcohol and tobacco expenses but I found that the correlation between festivals and entertainment caught my attention.
ReplyDeleteIt is very true that there is a large emphasis on religious festivals and ceremonies in India. As I was raised in an Indian family, we save money for certain events like these. Because of the strong religious ties, especially in Udaipur (Southern India), entertainment is replaced with festival spending. This correlation promotes the idea of the impact of cultural norms on economic spending. Technology is much more expensive in third world countries to begin with, so it would naturally be harder to obtain a TV or radio than it would be for poor in the US.
When Banerjee mentions how the poor's "self-happiness" rates were not as low as expected, I was also curious if this is a cultural phenomenon. In India, the concept of duty, is widely held and followed and the caste system, even though removed, is still known to exist in rural, poor areas.
I would like to read more about why they choose not to specialize or migrate to look for work.
I think that because many among the extremely poor have been raised in societies where a hand to mouth existence is the only way of life, it is understandably more difficult for them to make the economic decisions that will benefit them most in the long run. Because the extremely poor are heavily influenced by their upbringing as well as the other people in their socioeconomic class, it seems they are more inclined to handle their finances like everyone else they know, valuing concrete results in the present over the potential future benefits of saving and investment. The power of influence of the rest of the community over how individuals in poor societies earn and spend money is exemplified in how many of the women of Guntur shared the same routine of cooking dosas in the morning and selling other goods in the afternoon.
ReplyDeleteEven though Banerjee and Duflo point out that some of the extremely poor may have the economic tools to improve their quality of life, those tools are useless if the poor don't know how to use them. I definitely agree with the idea that these people are in need of the type of guidance that would bring about a complete paradigm shift in the way they view money, prioritize their spending, and accumulate capital.
Through careful analysis, I felt Banerjee and Duflo shed a profound light on the world of extreme poverty. Not only did I get a glimpse of the lives of the poor, but I also gained insight about the causes of abject poverty. I feel that the most significant factor impeding the poor's advancement is their inability to allocate their financial capital wisely. I did not realize that, on average, the impoverished spend over 4% of their income on alcohol and tobacco and 7% on sugar (6). While I understand that these "luxuries" provide some form happiness, they are excessive. As a result, those in extreme poverty do not allocate enough financial capital to durable goods. Banerjee and Duflo refer to these goods as productive assets (8), which would help them expand their businesses and earn more income.
ReplyDeleteWhile there are many factors contributing to the poverty trap, I believe that a lack of basic financial savvy is one of the root causes. This problem, however, can be mitigated by improving the education systems in these countries. Schools in impoverished areas are few and far between, and these schools lack funding, dedicated and knowledgeable teachers, and strong attendance (10). I believe that a decent education will better equip the poor to deal with the challenges of escaping poverty.
I can see why the Banerjee and Duflo article has had such an impact on the study of Development Economics. In the earlier section of the article, Banerjee and Duflo talked about what the data showed about what the poor/extreme poor were spending with their $2.16/$1.06 per day income. I found their marginal propensity to consume not all that radically different than, say, the average Chinese citizen. Though they clearly had a much larger portion of their budget devoted to subsistence-level nutrition, the poor/extreme poor represented in the data allocated rather large portions of their budget towards entertainment (varying from festivals to TVs) as well as such things as alcohol tobacco. I found that as quite an eye-opener, considering how vital each bit of their budget is for both their survival and livelihood. However, I say this as both a fairly well-educated individual planning to major in economics (the science of decision-making), so I can't expect the people represented in this data to come to an optimal level of consumption, savings, investment, etc. Additionally, I have not experienced what the conditions are like for the people represented by the data, which also vary widely in both culture, family circumstances, and peer pressure (such as trying to not look poor in comparison to one's neighbor, which the article touched on with an anecdote). However, it would be interesting to see how simple, but powerful actions taken by the government could help change their situations around. For example, one of the reasons the article gave which seemed to affect the savings rate was that of a real sense of insecurity. Scott mentioned above that a simple lock-box has appeared to had a positive psychological impact on the individual's savings rate. I would find it interesting if a government created incentives for banks or other such institutions to offer more affordable and attractive loans and accounts. The steps the government might take might include reduced taxes or something. However, the psychological impact of not having the extra money immediately at hand but also knowing that it is secure would certainly be interesting to see. This also brings me to the one thing that I notice throughout the article, rule of law seems to quite weak, if present at all, in the 13 countries surveyed. The picture painted by the article seemed to be one of household with little confidence in anything other than themselves and what they can accomplish in the short-term. Institutions (government or otherwise) seemed either ineffective (such as schools), harmful (such as some health-care institutions), or ones that did not provide enough of an incentive to appeal to most of the poor (such as many of the lending institutions). It clearly seemed as if the only thing that seemed to not cost them in terms of risk and the time they cans spend with their family was to rely on their ability to endeavor on not so productive entrepreneurial activities, which amounted to a bunch of odd jobs. This ultimately has not allowed many in the survey to specialize or employ the full capabilities of themselves, their assets, and each other. The situation, though tough, seemed to have enough opportunities for improving one's situation. However, one solution lies in more effective education and training. Drawing from my China's modern economy course, training people to treat basic wounds/ailments, administering drugs, and other basic medical needs could greatly help reduce mortality rates. Changing the educational system so that it is more oriented in teaching more practical lessons in life, such as farming, could have a much more effective impact on the lives of the poor.
ReplyDelete...
I can see why the Banerjee and Duflo article has had such an impact on the study of Development Economics. In the earlier section of the article, Banerjee and Duflo talked about what the data showed about what the poor/extreme poor were spending with their $2.16/$1.06 per day income. I found their marginal propensity to consume not all that radically different than, say, the average Chinese citizen. Though they clearly had a much larger portion of their budget devoted to subsistence-level nutrition, the poor/extreme poor represented in the data allocated rather large portions of their budget towards entertainment (varying from festivals to TVs) as well as such things as alcohol tobacco. I found that as quite an eye-opener, considering how vital each bit of their budget is for both their survival and livelihood. However, I say this as both a fairly well-educated individual planning to major in economics (the science of decision-making), so I can't expect the people represented in this data to come to an optimal level of consumption, savings, investment, etc. Additionally, I have not experienced what the conditions are like for the people represented by the data, which also vary widely in both culture, family circumstances, and peer pressure (such as trying to not look poor in comparison to one's neighbor, which the article touched on with an anecdote).
ReplyDelete...
However, it would be interesting to see how simple, but powerful actions taken by the government could help change their situations around. For example, one of the reasons the article gave which seemed to affect the savings rate was that of a real sense of insecurity. Scott mentioned above that a simple lock-box has appeared to had a positive psychological impact on the individual's savings rate. I would find it interesting if a government created incentives for banks or other such institutions to offer more affordable and attractive loans and accounts. The steps the government might take might include reduced taxes or something. However, the psychological impact of not having the extra money immediately at hand but also knowing that it is secure would certainly be interesting to see. This also brings me to the one thing that I notice throughout the article, rule of law seems to quite weak, if present at all, in the 13 countries surveyed. The picture painted by the article seemed to be one of household with little confidence in anything other than themselves and what they can accomplish in the short-term. Institutions (government or otherwise) seemed either ineffective (such as schools), harmful (such as some health-care institutions), or ones that did not provide enough of an incentive to appeal to most of the poor (such as many of the lending institutions). It clearly seemed as if the only thing that seemed to not cost them in terms of risk and the time they cans spend with their family was to rely on their ability to endeavor on not so productive entrepreneurial activities, which amounted to a bunch of odd jobs. This ultimately has not allowed many in the survey to specialize or employ the full capabilities of themselves, their assets, and each other. The situation, though tough, seemed to have enough opportunities for improving one's situation. However, one solution lies in more effective education and training. Drawing from my China's modern economy course, training people to treat basic wounds/ailments, administering drugs, and other basic medical needs could greatly help reduce mortality rates. Changing the educational system so that it is more oriented in teaching more practical lessons in life, such as farming, could have a much more effective impact on the lives of the poor.
ReplyDeleteI am sorry for the above paragraph, as it is a rather lengthy string of ideas which came to mind in a rather incoherent way. However, I find this article interesting in how it has taken the data and drawn conclusions that show that each country/province/city has different factors that affect the decisions of the poor/extreme poor. Yet, the article also shows that there appear to be some common themes across the different examples, namely the fact that specialization is often absent in some sense, savings is a clear issue, long-term migration is largely not utilized, and money is spent somewhat impulsively. Yet, the poor people surveyed appeared much happier than those making many time more money than they are. I am interested to continue to expand on these ideas and to look at more data.
ReplyDeleteTo expand upon the idea of the cyclical nature of poverty that Katie discusses above, I believe one of the driving forces behind this pattern is the interconnectedness of the institutions and components that comprise the daily lives of the poor. I found one of the strengths of Banerjee and Duflo’s paper to be the breadth of issues and data which were combined and presented to give a larger picture of the complexity of the causes of poverty. The volume and diversity of data utilized from measurements of spending patterns, work, health, education, quality of infrastructure, and access to essential markets both highlighted individual causes and demonstrated that no aspects of poverty are truly isolated from other influences. The domino effect that results from one shortcoming or failure in the decisions of or resources available to the poor can and does have potentially devastating results from which recovery is exceptionally difficult. It seems that the cards are so often stacked against the poor that this is no room for them to maneuver and attempt to overcome their problems when a stretch of bad luck is encountered. This sentiment is undoubtedly demoralizing and ultimately seems to be where the authors arrive in the final paragraph of the paper to explain the apparent lack of motivation towards increasing income.
ReplyDeleteI find this interconnectedness of the aspects behind the lives of the poor somewhat daunting when looking toward potential ways to alleviate poverty. As my interest and experiences are primarily within the world of healthcare, I was interested in the authors’ analysis of the health of and healthcare institutions available to the poor. As Banerjee and Duflo discuss and allude to, the health of an individual is affected not only by their access to healthcare and the quality of healthcare institutions but also by their nutritional habits, living conditions, work, public infrastructure, and social network. To effectively improve the health of a poor individual, it is often not sufficient to simply visit a physician; rather, several fundamental changes to the different aspects and institutions in an individual’s life must be enacted for the full benefit of having access to consistent, quality medical services to be realized.
- Greg Kurkis
Banerjee and Duflo's details on developing nations lack of adequate communication, financial, and transportation infrastructure helps to explain much of the rationale surrounding decisions made by the poor. In the US and other developed nations, strong infrastructures underpin vibrant economies and attract both foreign and domestic investment seeking returns within an established market. Developing nations however, lack this infrastructure as highlighted by Banerjee and Duflo and as such struggle to attract the equity (not just credit) required to build stable businesses. The lack of adequate infrastructure and by extension the limited economic choices faced by the poor, not surprisingly manifest as increased migration, lack of specialization, lack of an adequate banking system, lack of a virtuous educational cycle (better education makes better teachers makes better education), etc.
ReplyDeleteWhile I agree that infrastructure develops alongside an economy and not in front of it, technological improvements allow for infrastructural inroads requiring an ever decreasing amount of capital (think cell phones over landlines for example) which if properly leveraged can dramatically cut down the amount of time infrastructure takes to develop. Unfortunately, truly poor developing nations do not have the luxury of an established market to attract such infrastructural investments at the current time. Instead (and I found this to be particularly interesting) it seems that in certain cases, the impoverished maintain an ability to innovate themselves out of infrastructural dilemmas such as creating groups that pool savings and offer loans from their existing savings base (15). In this case, not only are participants extending credit within their community, but they have the market knowledge and relationship to recognize and deem credit worthy investments. In cases such as these, improvements in communication infrastructure (radios for example) can expand these organic solutions allowing for more rapid and widespread development with transportation infrastructure following.
In summary, Banerjee and Duflo’s paper, while broad in scope, demonstrated quite clearly that the poor are neither hopeless nor irrational, but instead face a limited set of choices given their constraints. Indeed many of these constraints are infrastructural in nature and as such, creative measures that address these problems should constantly be encouraged in order to broaden options. Considering basic infrastructure can be installed in the near term, more dynamic infrastructural solutions will undoubtedly follow.
Banerjee and Duflo’s work examining the economic lives of the poor explained the behaviors and living conditions those living on under $1 or $2 per day, creating an enlightening and thought provoking article demonstrating the multi-faceted complexity of poverty. Perhaps because we often take our education for granted or because education is often viewed as a means to rise out of poverty, I was particularly interested to learn about the educational situation among the poorest of the poor. Though most children in the thirteen countries in the studies attended school and the rates of education appear fairly high - at least 50 percent of both boys and girls aged 7 to 12 in extremely poor households are in school in all but one of the thirteen countries studied - the quality of instruction is poor and results from schooling are almost nonexistent. Rampant teacher absenteeism plagues the developing world, as the average absence rate among teachers is 19 percent, a statistic which fails to capture the quality of instruction when the teacher is actually present. This points to governmental infrastructure problems that are not easily fixable. Although private schools perform better according to absenteeism statistics, their sometimes prohibitively high costs along with unqualified instructors may not provide a better alternative to public schooling. One of the most striking statements for me was when Banerjee and Duflo explained that parents may not know if their children can read or the extent of their academic capabilities because they themselves are illiterate. Children lack basic reading, writing, and arithmetic skills. As discovered by a nationwide study conducted in India, although 93.4 percent of children ages 6 to 14 are enrolled in school, 34.9 percent of children age 7 to 14 cannot read a simple paragraph at a second-grade level. By acquiring a fundamental skill set, people would be qualified to obtain higher-skilled jobs and thus earn a higher income, raising their standards of living and perhaps enabling them to emerge from the poorest of the poor to more prosperous lives. Even areas that on the surface appear to be in better condition and report favorable statistics, such as education compared to access to credit, when examined, are not so. This is especially deplorable in the field of education, which could give children the knowledge and tools to excel and imagine lives beyond their impoverished backgrounds.
ReplyDeleteA number of things really struck me struck me in this article, but because I am especially interested in education and aspects of human development, the discussion of education and financial and social stress interested me the most. I was not at all surprised that Banerjee and Duflo found that the poor report being under a lot of financial and psychological stress. When thinking about disadvantaged populations, I certainly consider financial difficulties, but not on a level as specific as spending per calorie, for example. Another financial burden they face is in saving. Not only do the poor have little saved in the first place, but there is also the aspect of the safety of saving their money, as well as protecting it from inflation. While the authors found that the poor do not show low self-reported happiness and health levels, I would think that under economic stress, when a "form of 'insurance' is often eating less" (16), there health would suffer, and therefore the poor would, in fact, self-report lower health levels.
ReplyDeleteMy other concern was the education of the poor. It is a well-known fact that there is a disparity in the educational opportunities between different socio-economic groups. It is unfortunate that public schools in these poor communities are often found to be dysfunctional and that families are opting to pull there children out in favor of paying for private school. Even then, however, a better education is not even guaranteed.
While Banjerjee and Duflo touch on a myriad of topics relating to the lives of the severely impoverished, one thread of commonality that seems to tie the many different facets together is the cyclical nature of poverty itself. For instance, the authors make a great point about why the poor don't invest more in education. They suggest that this lack of sufficient investment is not because the poor do not value education but rather because in many cases poor parents are uneducated themselves and thus fail to see the low returns to education provided by their current school systems. In many poor countries this creates a cycle of illiteracy that is very difficult to break and is very detrimental to human capital.
ReplyDeleteThe authors bring to light another example poverty's cyclicality through their discussion of the prevalence of entrepreneurs in poor countries. In many countries the poor run small, often inefficient businesses. Often times the entrepreneur will solely employ members of his or her family. As the authors point out, this makes job creation for others almost nonexistent. With little or no job creation the only means of making a living is through menial jobs in these types of inefficient firms, yet again creating a cycle this is detrimental to the overall economic health of poor countries.
In my opinion, the most important contribution of Banerjee and Duflo does not lie in the descriptive nature of their work but rather in how the authors effectively provide a basis for analysis of the limited set of choices that the poor face. Take the example of education. As Emily Darling mentioned, there are incredible disparities in educational opportunities between different socio-economic groups and even between gender and ethnic groups. A good way to explain why these inequalities in education exist is by analyzing the choices or options that a poor person in Mexico, for example, has. In a country like Mexico, many poor parents decide to pull their children out of school because it is more beneficial for the household to have their children working and generating income rather than attending school. In economic terms this means that the opportunity cost of going to school is much higher than the opportunity cost of pulling out of school. In the words of Banerjee and Duflo “the poor are trading off opportunities to have higher income.” This is a problem. But, how do we solve this? In my previous example, a way to promote education would be by creating incentives that decrease the opportunity cost of going to school. Conditional cash transfers (CCT) are a good example of this type of incentives. CCT are small amounts of money that are transferred by the government to poor households in return for enrolling children into public schools, or taking them to health centers. These programs have been very effective in countries like Brazil, Mexico and Chile and have proved to address the problems that Banerjee and Duflo describe. Evidently, CCTs alone will not solve the problem of poverty and inequality. There needs to be also a system of infrastructure that supports these initiatives. Banerjee and Duflo do a very good job in not only in explaining the limited set of choices of the poor but also in describing the problems in infrastructure that keeps poor countries away from growing and developing. One of my main goals this term will be to understand how to improve the infrastructure of poor countries when governments lack the capital to finance new growth initiatives.
ReplyDeleteClearly, extensive work went into publishing this paper on the lives of the poor and it effectively serves to give a great overview of the hard lives the extremely poor live. In the spirit of what we discussed in the first day of class about the vague study of “developmental economics,” I think this article goes to show the difficulties of the study in general. There is no universal economic model to solve the economic problems in developing countries. Banerjee and Duflo’s ability to remove themselves from the nature sympathy towards these people and consider it realistically from all angles really enhances the significance of their findings. The way the paper progresses from summary, to analysis, into questioning the decisions of the poor is done perfectly. They show how each problem needs a solution specialized for the specific people it is geared towards helping.
ReplyDeleteThe diversity of countries and societies sampled in the paper highlights the importance of understanding the culture of a group of people before making any sort intervention. I was struck by the country-to-country differences in spending habits on vital needs such as food, education, and healthcare; not to mention the contrasting spending habits on discretionary items. For too many of these people in deep poverty, the lack of money may be so overwhelming that the concept of saving such menial amounts goes by the wayside. The patience and self-control need to watch their saving development might just be nonexistent. This lack of financial discipline is one reason why the limited access the extremely poor have to credit can sometimes create problems in the long run. The blame for this should be put both ways. Issues of careless lending to prospective borrowers who are not prepared to invest the money properly must exist when dealing with loans that are relatively so small. There is a significant amount of moral consideration needed in the business of microloans. All borrowers want to be successful entrepreneurs however few realize the hard work needed to create a profitability business so after failing to invest loans properly they are stuck with problems repaying the creditors. I believe, access to a proper education and access to credit are the most important issues facing the extremely poor. However, as mentioned above, it is not as simple and placing a few schools and banks in all of these communities. At the crux of the problem is how each specific society functions and it is made very apparent in the first section of the paper that these societies are incredibly different while all faced with the fundamental issue of extreme poverty. Only after full understanding the inner workings of the cultures will any of these aid programs be able to flourish and properly enhance the standard of living for the extremely poor.
There are a few points that I would like to touch on in response to this article and yalls posts, the first being spending habits. I agree with Allison who, earlier, says that a person needs more than just food. (I know that other people shared this mentality, but I wrote down Allison’s comment first.) My thoughts are that it is not enough just to survive physically; you must endure mentally as well. Coping with the mental aspect of extreme poverty, I argue, is probably more difficult than the physical one and I believe that culture and community help people endure poverty. Having musical and religious activities brings people of the same environment together, which not only gives them a community, but also gives them people on which to depend.
ReplyDeleteSecondly, I believe that the presence/absence of Democracy plays an important role in how effective a country is at establishing sufficient education, property rights institutions, and contracting institutions; all of which are vital in alleviating poverty. Education is importing in a few ways. Obviously, it gives the poor the tools (reading, writing, understanding the function of government, specialization, and others) required to improve their lives. (Just a side note on specialization: While specialization is enormously efficient, it can only arise to its economic potential through adequate education. In the context of occupational specialization, an increased portion of the workforce that specializes in their particular profession causes the economy to develop into sectors that produce goods more efficiently. Employees specialize in the products that they manufacture with the least opportunity cost, which expands the production frontier as well as lowers the costs of production. This effect also causes workers to think for themselves. When work is specialized, employees group into unions that fight for better working conditions. Labor unions promote democracy because they require collective action and demand representation of their interests.)
The article is thought provoking and one that I believe to be a good first look at poverty in its relation to development economics. It is very interesting to see the percentage comparisons between different countries, and see how their priorities influence their lifestyles and basic resource allocation. I find it interesting to see nations relatively advanced in some categories, yet severely lacking in others.
ReplyDeleteOne of the main things I was able to take out of this reading is that there is hope. With some changes in their business model and overall approach to specialization, there seems to be a great deal of room for re-organization and potential growth. With the proper infrastructure and the rooting of business friendly institutions I believe that the figures 20 years down the road will be drastically improved.
@Thomas:
ReplyDeleteThanks for your comment, I basically agree with all you said, I find your point on democracy particularly interesting. I agree with you that an efficient and functioning democracy can help to alleviate people out of poverty, but oftentimes, especially in developing countries (sometimes even in developed countries, see Singapore, which has a flourishing economy under dictatorship) non-democratic regimes are as efficient as (Western) democracies in promoting economic growth. If you look at China and India as two comparative examples, the Central Chinese government has been doing a better job in driving up China's economy than the Indian democratic government for India's economy, partly due to the overwhelming power of the central government in Beijing and its efficient implementation processes of economic reforms (no long voting and persuasion processes or extensive bureaucratic procedures)
Don't get me wrong, I am a convinced supporter of democratic regimes in most cases, but democratisation of developing countries can go very wrong not just politically, but also economically and we should not disregard the sometimes very efficient measurements of nondemocratic governments in enforcing economic reforms for their countries and people. Here, I am only speaking about the successful economic policies of some autocratic or one-party regimes, bearing in mind that political freedom is equally (or even more?) important to the people and are deliberately oppressed by these systems, which I strongly oppose.
Banerjee and Duflo’s “The Economic Lives of the Poor” touched on many interesting aspects of extreme poverty. In the process of breaking down the lives and habits of people who survive off of about $1 per day a few statistics stood out in particular to me. The first statistic that stood out was the percentage of money spent on items that are not necessary to survival. The fact that these people spend 15% of their budget on festivals, alcohol and tobacco was shocking. One would assume that more money would be spent on food, especially because of the high rates of malnutrition and below recommended calorie intake.
ReplyDeleteThe second point I found interesting was the lack of specialization. These impoverished people are stuck within a cycle of poverty with little to no chance of advancing themselves. People in these areas spend practically nothing on education and eventually drop out of school long before finishing their education. Due to lack of training and education, these people lack the skills to specialize in any particular areas. Because of this they work several different temporary jobs that offer no stable support or future improvement.
The combination of inefficient use of money and lack of skills and education solidify this cycle of poverty. What this cycle reminded me of is the cycle of chronic homelessness. The majority of these homeless suffer from mental illness and/or addiction. The factors that cause these cycles are different between the homeless in America and the extremely poor elsewhere in the world, but the two groups suffer from similar issues. The issues of inefficient spending and lack of specialization are two major factors in the cycle of poverty and homelessness. One last similarity is the difficulty and uncertainty of how to help the homeless and impoverished. As I was reading this paper, I kept being reminded of homeless and the problem of homelessness in America.